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Why We Believe (Wrongly) Membership Fees are a Bargain

Why We Believe (Wrongly) Membership Fees are a BargainCostco and other discount membership clubs sell product to 1 in every 11 people in the United States and Canada, according to a recent study. Why do so many people shop in these vast emporiums? We believe that by purchasing pallets of pickles, vats of Vaseline, and beef cuts the size of a Toyota Camry we can save money.

Well, at least we think we save money. And the primary reason for that, new research from Harvard Business School suggests, is the annual membership fee we pay for the privilege of shopping members-only.

Authors Michael I. Norton and Leonard Lee found that the presence of membership fees alone -- independent of any actual savings -- can lead consumers to infer a link between fee and savings. And since we are getting such excellent "bargains", we often spend more than we otherwise would.

Read a summary of the research and a link to the paper itself, The "Fees â†' Savings" Link, or Purchasing Fifty Pounds of Pasta.
The highlights:

  • When stores charge membership fees, consumers behave irrationally and infer a "fees â†' savings" link in the belief that stores charge fees because they offer better prices.
  • The presence of fees leads to increased spending.
  • Consumers in the study were more likely to express a desire to shop at stores that charged fees than those that did not, even when products and savings were similar.
Are we to pity these gullible shoppers -- people like me, a card-carrying Costco member? Not at all, the researchers say. The warm, fuzzy feeling we get when we think we are getting a bargain is only slightly offset, the researchers write with a smile, "by the vocal displeasure of the shopper's loved ones when forced to lug groceries into the house for 30 minutes...."

Are you a warehouse club addict? Would the absence of a fee change the way you think about big box prices?

(Warehouse club image by Orin Optiglot, CC 2.0)

Sean Silverthorne

Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.

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